Jaguar Mining: A Rough Start To The Year (TSX:JAG:CA)

The Q1 earnings season is roughly two weeks away, and many producers have reported their year-end 2023 results and preliminary Q1 results. One of the most recent companies to report its Q1 operational results was Jaguar Mining (OTCQX:JAGGF) and, true to form, it was another massive disappointment. Not only did production dip 11% year-over-year against easy comparisons, but it was the weakest quarter for the company in over five years, with a consistent downtrend in output. On a positive note, this trend is expected to come to a halt, and we may have just seen through production, with Jaguar excited to bring the Faina deposit (Turmalina Mine) online later this year. In this update, we’ll dig into the FY2023 and Q1 2024 results, recent developments, and how the stock looks from a valuation standpoint after its recent rally.

FY2023 & Recent Results

Jaguar Mining released its Q4 and FY2023 results last month, reporting quarterly and annual production of ~18,500 ounces and ~70,700 ounces, respectively. The results were well below my expectations and miles below the company’s annual guidance midpoint of 86,000 ounces, and costs soared yet again, with all-in sustaining costs [AISC] coming in at $1,618/oz vs. $1,483/oz in the year-ago period. Not surprisingly, this put a dent in cash flow generation despite the tailwind from a higher gold price, with cash flow sinking to ~$36.0 million (FY2022: ~$40.8 million) and the company reporting free cash flow of [-] ~$8 million (FY2022: [-] ~$9 million) despite lower capital expenditures. And while the market is forward-looking and has already digested the underwhelming 2023 financial results, the most recent operational results reported in early April have worsened despite lapping easy year-over-year comparisons.

Looking at the Q1 results, Jaguar reported its weakest quarter in over five years, with production of just ~16,200 ounces of gold, driven by lower grades and throughput at both of its mines. The weaker performer in the quarter was Turmalina, which saw its production slide 17% year-over-year to ~6,800 ounces of gold based on ~95,400 tonnes processed at 2.59 grams per tonne of gold and slightly higher recovery rates. Jaguar noted that the Q1 production was affected by a “heavy rainy season” and dengue fever that impacted its workforce more than the pandemic. Fortunately, the company has seen a drop in dengue fever cases and produced just shy of 6,300 ounces of gold in March, with it confident it can make up for the Q1 shortfall over the balance of 2024. The other positive takeaway was that monthly production at Pilar hit its highest levels in two years with mining from the new BA-Torre orebody at Pilar, which made up ~20% of ore tonnes in the period.

Given the weak Q1 results (~15,700 ounces of gold sold), it’s set to be another ugly quarter financially, even if the gold price has provided some help. This is because the bulk of gold’s Q1 gains came in the second half of the quarter with an average realized gold price of $2,070/oz, suggesting revenue will dip nearly 10% year-over-year from the ~$35.8 million reported in Q1 2023. Meanwhile, all-in sustaining cost margins will remain under pressure given that much fewer ounces were sold (~15,700 ounces vs. ~19,000 ounces), suggesting a disappointing Q1 report on deck in May when the company reports its results. That said, there looks to be a light at the end of the tunnel after what’s been years of disappointment, with Jaguar getting some decent intercepts out of BA-Torre (Pilar), on track to bring a higher-grade orebody online in Faina (Turmalina), and hopeful that it can bring a third mine online later this decade with its new Oncas de Pitangui Project.

Recent Developments

As for recent developments, there are certainly some positives, even if they haven’t shown up in the production and financial results to date. For starters, the company continues to report solid results from its BA-Torre orebody, which is higher-grade and will continue to contribute this year with the potential for a meaningful lift in production growth at Pilar in 2026 as it benefits from increased ounces per vertical meter. Simultaneously, the company is working to bring the higher-grade Faina orebody online, with reserves of ~787,000 tonnes at 5.22 grams per tonne of gold (132,000 ounces), well above the average reserve grade of 3.38 grams per tonne of gold at Turmaline and 3.17 grams per tonne of gold at Pilar. So, while production has plunged from FY2020 levels of ~91,100 ounces, there looks to be a path to the 100,000 ounce mark at lower costs in 2026 if the company can execute successfully on these near-mine growth opportunities.

If this were another company with a glowing track record of delivering on promises like Agnico Eagle (AEM), I would be infinitely more bullish on this potential. However, Jaguar has consistently over-promised, as discussed in the below section (“2024 Outlook”). And while I am not ruling out the company’s ability to turn things around after a brutal three years operationally, the market might be slow to give the company credit for its projected growth, with it needing time to regain the market’s trust. That said, the medium-term goal of 100,000 ounces does look quite doable with this being relatively low-hanging fruit (high-grade ounces near current infrastructure and this should provide a nice boost to 2026 free cash flow generation if the gold price can continue to cooperate.

2024 Outlook

Jaguar’s delivery against its guidance midpoint over the past three years has been pitiful, with an 18% miss last year (~70,700 ounces vs. ~86,000 ounces of gold) and an average miss of ~13,700 ounces over the past three years. This is one of the worst track records of meeting guidance sector-wide among all producers. Fortunately, Faina and the BA-Torre orebody will help to pick up some slack, but the company started out the year behind the eight-ball once again. As for cost performance, the Brazilian Real has weakened a little vs. the US Dollar (UUP) and inflation rates in Brazil have continued to trend lower, which should help to reduce the rate of change in operating costs we’ve seen from 2020 to 2023 ($647/oz cash costs -> $1,126/oz cash costs). However, most producers continue to experience single-digit inflation and while Jaguar has worked on cost optimization, I’m not that optimistic about the company’s ability to sustain all-in costs below $1,750/oz with relatively low-grade operations lacking economies of scale.

Fortunately, while Jaguar’s costs have risen at a rate well above that of its peer group, this has made it significantly more leveraged to the gold price, which is benefiting it currently. And while AISC margins have averaged ~$308/oz for the past two years, they have the potential to double to ~$600/oz in FY2023 assuming similar all-in sustaining costs and an average realized gold price of $2,200/oz (year-to-date gold price sitting at ~$2,110/oz). That said, while this will lead to a significant increase in free cash flow generation and Jaguar could generate up to $20 million in free cash flow this year, it is still a highly leveraged small-scale producer, and I see no reason that a lower-quality micro-cap stock should trade at a double-digit free cash flow multiple, let alone a high single-digit free cash flow multiple. Let’s dig into the valuation below:

Valuation

Based on ~82 million fully diluted shares and a share price of US$2.15, Jaguar Mining trades at a market cap of ~$176 million. This is not an unusual valuation for a small-scale non-Tier 1 jurisdiction producer in the gold sector (especially given its very poor track record of delivering on promises and much higher costs). And while the stock has significant leverage to the gold price, it’s currently found itself trading at ~10x FY2024 free cash flow estimates of ~$19 million using a $2,200/oz gold price assumption ($90/oz above the year-to-date average). Some investors might argue that this is a cheap valuation considering that the stock briefly traded up to 16x free cash flow at its 2020 peak, but as we quickly found out, this was not a sustainable multiple for the stock. In fact, the stock lost 70% of its value over the following year, despite a very mild correction in the gold price.

So, what’s a fair value for the stock?

Using what I believe to be a more conservative multiple of 6-8x free cash flow for a high-cost junior gold producer based out of Brazil, I see a fair value for the stock of US$1.50 to US$1.95. And even if we use the high end of this range (8x) and FY2024 estimates, Jaguar is now trading above its more conservative fair value assumption of US$1.95. In summary, I see limited upside from current levels for the stock and I think there are far more attractive bets elsewhere in the sector, like B2Gold (BTG) which has ~15x the scale (~1.2 million ounce producer in 2025 vs. Jaguar at ~80,000 ounces), higher margins, a phenomenal track record of beating guidance, a 5.0% dividend yield, yet it’s trading at just ~5.5x FY2025 free cash flow estimates. And when quality is available at a lower multiple with a superior sentiment backdrop (sentiment near rock-bottom levels for BTG), backing the higher-quality name is typically the better move.

Obviously, a rising tide will lift all boats, and Jaguar could certainly trade closer to US$3.00 per share if gold prices can stay at/above current levels with free cash flow set to increase further next year. Still, I think the multiple of 9.0x free cash flow is very generous for a low-quality producer like Jaguar with a spotty track record, especially when other names sector-wide are still trading at depressed multiples. So, with Jaguar now being more of a gold price play as it will need either a higher gold price or multiple expansion from an already full multiple to re-rate, I don’t see any way to justify paying up for the stock above US$2.20.

Summary

Jaguar Mining had another rough year in 2023 with a massive miss vs. guidance, and this marked its third consecutive annual miss. And while 2024 is expected to be a better year with initial contributions from the higher-grade Faina deposit, the year is not off to a great start with its weakest production quarter in over five years in Q1. On a positive note, the gold price has overshadowed the operational setbacks in Q1 and Jaguar will back to positive free cash flow generation after two years of outflows in 2022 and 2023. Still, with higher-quality producers trading at much higher FY2025 free cash flow yields with stronger operational track records and much higher-quality assets, I continue to see far more attractive bets elsewhere in the sector.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.